The hedge fund industry will likely bifurcate into those offering low risk, single digit returns and those integrating high risk, high return strategies. Michael Roth, founding partner at hedge fund manager Stark Investments, said the days of generating returns in the teens with low volatility strategies are coming to an end. The transformation of hedge funds from cottage enterprises to fully fledged institutions has hastened the movement of capital leveled at many arbitrage plays and this is making it harder to find opportunities.

To boost returns, some arbitrage hedge fund managers are now looking to introduce risk. For example, taking directional views in a convertible bond arbitrage fund could generate greater returns, by increasing risk, he said.